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It's not time to stress about interest rates

Peter Switzer
6 April 2022

The collective pressure of the media powered by some economists has everyone stressed out about rising interest rates before it’s necessary to do so. In fact, if you’re shivering in your boots then do something about it. I’ll show you what to do after I put this excessive interest rate scare program to bed.

After every first Tuesday of the month (except for January), the RBA Board meets, checks out the economy and decides if it needs to raise rates, drop them or keep them on hold. Despite a lot of fear around inflation and interest rates, this month the experts on monetary policy said ‘no’ to a rate rise.

It was a very sensible decision and means the official cash rate remains at the historically low level of 0.1%.

Some analysts are looking at the high cost of living, thanks to the three Ps, and wondering when the RBA will start fighting inflation that’s in the pipeline with higher interest rates.

I reckon Dr Phil Lowe is hoping the 3 Ps are transitional and will peter out over 2022, so he won’t raise rates until he thinks the time is right.

Where are the three Ps? Try the pandemic, the petrol price and problems with the supply chain.

If the RBA is wrong and these pricing pressures remain, then by July or August we could see the RBA move to start raising interest rates.

The RBA boss has long argued that it would require inflation to be sustainably in the 2-3% range before it would consider lifting rates.

So we have a battle between a temporary spike in inflation (which is set to show up in the data over the next few months) and what might happen after the Ukraine war stops and oil prices fall, bringing down the price of petrol. The Josh Frydenberg 22 cents a litre cut in the fuel excise slug will also help bring down inflation.

I’m sure Dr Phil would be betting that the inflation effects of the pandemic ease over 2022 because the world is now better at fighting that damn virus, which will bring down the costs of imports.

And just generally, as the world gets back to a new normal, a lot of the higher costs associated with the pandemic should fall and hopefully, productivity will rise, which also helps reduce costs and then inflation.

Already we’re seeing house prices start to rise more slowly. In some areas, there have been actual price falls, a point Dr Phil made yesterday: “Housing prices have risen strongly over the past year, although some housing markets have eased recently. With interest rates at historically low levels, it is important that lending standards are maintained and that borrowers have adequate buffers.”

Phil is bound to be patient but some economists think he’ll have to move on rates by June. I doubt that with the current inflation rate at 3.5%. This will go higher because of recent petrol price rises, but, as I’ve pointed out, there will be forces to bring this price hit on inflation down.

Right now lenders think the cash rate could get to 1.5% by the end of 2023, which means six 0.25% rises. So if you borrowed at 3%, your home loan rate could be 4.25%

Nine.com.au has used Finder's analysis, which “shows that a 75 basis point increase would cost the average borrower $3,175 this year by raising repayments by $265 a month.”

The average loan size is now $553,897, so you should be able to work out how your loan repayments are affected. If you’ve borrowed $1 million, then a 75 basis points rise in rates (or 0.75%) will cost you about $265 x2 or $530 a month or $6,360 a year!

Now’s the time to do your homework to get the lowest home loan rate possible. If you’re on a 3% home loan, why wouldn’t you try for a loan at HSBC at a 1.97% or 1.98% comparison rate?

Macquarie has a 2.14% basic home loan and loans.com.au has a 1.89% home loan but the comparison rate, which is the best rate to compare loans with, is 2.21% because of added charges with the loan.

I suspect you have at least three months or maybe more to get yourself into a lower rate home loan. Looking at websites such as www.ratecity.com.au might be a good start and then check out a couple of mortgage brokers to try and get the best deal.

Don’t say you haven’t been warned but also don’t believe the excessively scary stories about an “avalanche of rate rises”. Dr Phil isn’t dumb enough to burn Australian borrowers because it would cook the economy into a recession.

Expect interest rate rises but also expect them to be measured and manageable.

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